7:50 AM Jun 4, 1993

BANANA PANEL RULING AGAINST EC OPENS UP A PANDORA'S BOX

Geneva 4 June (Chakravarthi Raghavan) -- The GATT Panel which looked into the complaints against the current regime on banana imports in some of the EEC states (France, Italy, Portugal, Spain and UK) has ruled the regime to be GATT illegal and that the CONTRACTING PARTIES should request the EEC to bring the restrictions into conformity with the General Agreement.

The panel has further ruled that the tariff preferences accorded by the EEC to imports of bananas from the ACP countries (zero percent tariff against an EEC bound tariff of 20 percent) was also illegal and the EEC should be requested to bring the preference into conformity with the General Agreement provisions, unless the CPs choose to act in terms of Art XXV and give the EEC (which has to seek it) a waiver in relation to the Lome pact.

The present regime, under which the five identified countries restrict imports, comes to an end on 30 June, and the new EEC-wide regime is to begin from 1 July.

The new regime, which is also being challenged by the Latin American exporters who are seeking panel adjudication, provides for a two-million ton import at the 20 percent bound tariff (with ACP bananas continuing to come in free of duties) and a prohibitive 170 percent on imports above the 2-million ton tariff quota.

The panel report and rulings, besides affecting the existing banana regime, and the future one as presently promulgated, would however have wider and more far-reaching implications, ranging from the EEC-ACP Lome Agreement and its discriminatory effects on other developing countries as well as some of the widely, though misconceivedly held view, that things (whether it be some of the effects of the Rome treaty itself or the EEC association agreements) which have not been challenged for a long time and acquiesced in GATT, are hence valid and can't be challenged.

The GATT Council is due to hold its next meeting on 16-17 June, and that will be the first opportunity for the panel report to come before it. However, given the shortness of the time between the issuance of the report and the meeting of the Council, and the need not only for the EEC and ACP countries, but others too, to carefully look at the implications, the report is unlikely to go beyond the stage of the first round of views.

On Thursday, the EEC and the ACP countries would appear to have conferred on the issue.

Also at 16 June meeting, the request of Costa Rica and others for adjudication of their dispute over the new regime would also come up. In May, the EEC had blocked the panel adjudication request on the ground that until the measures entered into force, they could not be adjudicated. What stand it will take now remains to be seen.

But the EEC's new regime is also under attack from Germany and a few others.

"It is a Pandora's box or a can of worms, depending on how you view it," one GATT diplomat commented.

Besides the EEC and the complainants (Colombia, Costa Rica, Guatemala, Nicaragua and Venezuela -- Ecuador, though aggrieved, is not a GATT cp and hence no locus standi), the panel also allowed participation of Cameroon, Cote d'Ivoire, Jamaica, Madagascar and Senegal.

Before the GATT council, the ACP countries had said that while the issue seemingly was between the Latin American complainants and the EEC, it affected their vital interests and they should be parties. The Panel allowed the participants to attend all meetings where the parties to the dispute were present, make submissions, and receive the submissions of others.

The essential facts relevant to the dispute, as set out by the panel, are that imports of bananas into the EEC as on 31 December 1992, were subject to quantitative restrictions (QRs) in some member-states and a tariff preference favouring the ACP countries.

France had quotas, under a Presidential decree, and same as when France became a GATT cp, under which twothirds of the market was allocated to domestic producers and one-third to certain African countries.

Italy maintained a quota on bananas other than those from EEC member States and ACP countries.

Portugal had an import quota regime, with import licences accorded by auction.

In Spain the banana market was reserved to domestic production.

The UK maintained a quota regime, and set import quotas on bananas coming from complainants.

In the case of Belgium, Denmark, Greece, Ireland, Luxembourg and Netherlands, there were no quotas but imports were subject to the EEC's bound tariff of 20 percent except for ACP bananas.

The panel rejected the EEC contention that the import regime of these could not be challenged or considered. It noted the issue had been raised by the complaints in their complaint to the GATT Council, discussed during the consultations with the EEC.

The panel first held that the import quotas maintained were contrary to Art XI:1 which prohibited quotas or import or export licences or restrictions other than duties, taxes or other charges. The imports into France, Italy, Portugal, Spain and the UK were held to be inconsistent with Art XI:1.

As for the exceptions under XI:2 (which allows import restrictions on agriculture or fisheries as a part of domestic supply management measures), the panel noted that this was subject to several conditions: the measure must be an import restriction, must be on agricultural or fisheries product, it must be a governmental measure operating to restrict the quantities of a product permitted to be marketed or produced, necessary for enforcement of domestic supply restriction, it should not reduce total imports relative to totality of domestic production as compared to the proportion that might be expected to rule in the absence of restrictions, restrictions must apply to like products and there should be public notice of total quantity or value of quotas.

The panel held that the restrictions by France and Portugal were import restrictions, but that of Spain, which totally banned imports, was not a restriction.

The panel said further that the EEC had not proved that the measures taken by France, Portugal and Spain were effective in terms of restriction domestic production in terms of Art XI:2(c).

Nor were the restrictions proportional (as between domestic production and imports), required by Art XI:2 (c).

Hence, the panel said the measures taken by France, Portugal and Spain were inconsistent with Art XI:1 and not saved by Art XI:2(c). The restrictions by UK and Italy were also contrary to Art XI:1, and had not been claimed by the EEC to be consistent with Art XI:2 (c).

In terms of existing (at time of signing the General Agreement or accession) mandatory legislations, saved by the 'grandfather clause', the panel held that the QRs of France, Italy, Portugal, Spain and the UK were not justifiable as existing legislation either.

The EEC had then contended that even if inconsistent with Art XI, the restrictions were covered by Art XXIV, the article dealing with customs unions and free trade area agreements.

The panel held that while Art XXIV:5 enabled cps forming such customs unions or free trade agreements to deviate from their GATT obligations for the purpose of forming such arrangements or adopting interim agreements, it could not be done for any other purpose.

The provisions in Art XXIV:5 to 8, the panel ruled, did not provide cps with a justification for restrictive import measures, but only within the limits set out.

The banana import restrictions could not be justified and hence not saved by the provisions of Art XXIV.

The Panel did not go into the contention that the regime was also contrary to Articles II (tariff schedules), III (national treatment), VIII (fees and formalities for imports), XIII (nondiscriminatory administration of quotas) and Part IV of GATT (Trade and Development provisions for developing countries), noting that since the measures were contrary to Art XI, and not justified under XXIV or as existing legislation, there was no need to examine their validity visavis II, III, VIII and XIII.

As for Part IV, the commitments there were additional to other obligations and since the QRs were contrary to Part II of GATT, the panel had not found it necessary to examine its consistency with Part IV.

A major point advanced by the EEC was that the subsequent practice of the CPs or of parties to the dispute with respect to the banana regime had resulted in modification of rights and obligations under Part II and the complaining parties were estopped from now raising it.

The Panel said that any estoppel could only result "from the express, or in exceptional cases implied, consent of such parties or of the CPs".

The decision of a cp not to invoke a right at a particular point of time could be due to circumstances that changed over time -- for instance pending the outcome of a multilateral trade negotiations or pending an assessment of trade effects. Such a decision not to invoke a right by itself could not be reasonable assumed to be a decision to release another cp from its GATT obligations.

As for the contention about "subsequent practice of CPs", the panel said the mere fact that the EEC had notified the restrictions to the CPs and it had not been acted upon until now had not changed the obligations of the EEC under the General Agreement.

Any action of the CPs on these notifications would normally have resulted from a request for such action by cps. Since a mere failure to make such a request could not be interpreted as a decision to abandon the right to make such a request, the mere inaction of the CPs "could not in good faith be interpreted as the expression of their consent to release the EEC from its obligations under Part II of the General Agreement."

The EEC contended before the panel that the tariff preferences favouring the ACP countries, although inconsistent with Art I (most-favoured-nation treatment clause) was covered by Art XXIV, in conjunction with Part IV. The EEC argued that the requirements of Art XXIV (about customs unions and free trade areas) that the free trade must cover substantially all the trade between the constituent territories did not apply to free trade areas as between developed and developing contracting parties.

The EEC also contended that because of the principle of non-reciprocity set out in part IV, duties and other restrictive regulations of commerce in case of such free trade areas had to be eliminated only with respect of imports from developed contracting parties participating in such free trade areas.

Any issue arising out of this could not also be considered under Art XXIII (dispute settlement procedures) but under the special procedures in Art XXIV:7.

The Panel said the EEC arguments raised general questions of relationship between the GATT's dispute settlement procedures and other procedures and had been addressed by the CPs several times without reaching a definitive conclusion. Three panel reports adopted had gone into the relationship between XXIII and the XVIII:B relating to balance-of-payment procedures, and the panels had noted that the parties had chosen to proceed under XXIII. There was another unadopted panel ruling which had said that underlying purposes and balance of interests would be lost if parties could invoke general procedures under XXII:2 on measures to be reviewed under special procedures.

Hence, the Banana panel said, either Art XXIII was applicable to all disputes or not applicable to matters where the CPs could take decisions under Art XXIV. Even if this latter view were to obtain, XXIV procedures could prevail only in cases in which XXIV was invoked and prima face over agreements that could be covered under it. If preferences granted under any agreement in which XXIV is invoked would be ruled out by XXIII, then any cp could merely by invoking XXIV cold deprive other cps of their rights.

The Panel hence went on to examine whether the EEC-ACP Lome Agreement was one covered by Art XXIV.

Under XXIV:8(b), the panel noted, free trade areas had been defined as those in which duties and other restrictive regulations of commerce were eliminated "on substantially all trade between constituent territories, not merely on imports into one of the constituent territories".

The EEC itself considered the preference as one justified not by Art XXIV alone, but that article taken in combination with Part IV. The EEC had not sought to justify the preferences in terms of the provisions of Art. I:2 (trade between the colonies and metropolitican territories).

The panel said Part IV of GATT did not permit preferences inconsistent with Art I. Part IV provided for certain measures in respect of products of export interest to the less developed contracting parties but not the tariff preferences granted to developing countries. Part IV was intended to create obligations to developed contracting parties 'additional' to those in other parts of the General Agreement, and not intended to permit developed cps to subtract from those obligations, in particular those under Art I.

The legal basis for tariff preferences favouring the developing cps was the 1979 enabling Clause which limited such preferences to those under the Generalized Scheme of Preferences. If Part IV were to be the legal basis, there would have been no reason to adopt the Enabling Clause.

The panel recalled an earlier ruling (in respect of Norwegian textile import restrictions) that a QR inconsistent with Art XIII could not be justified under Part IV and said this reasoning applied to tariffs inconsistent with Article I too. An acceptance of the EEC argument would mean that Part IV, in combination with another provision of the General Agreement, could be a legal basis for elimination of Art I rights.

The panel also rejected the view that the note Art XXXVI (in Part IV, about relations in trade between developing and developed countries) made clear the principles there applied only to procedures under the GATT and not to agreements and negotiations that were not held within the framework of GATT.

Also, it could apply only in relations among contracting parties, whereas not all beneficiaries of the Lome pact were GATT cps. Under the EEC's argument, the provisions and principles of XXXVI, in combination with XXIV, could become a legal basis for extending to contracting parties benefits accorded to non-contracting parties, the Panel noted.

Hence, the Panel ruled, the interpretation proposed by the EEC could be consistent neither with the wording of Part IV nor with its purpose and function in the GATT legal system. It would introduce into the General Agreement a new exception from the most-favoured-nation principle that was never negotiated among cps.

The EEC's proposed interpretation would be inconsistent with the decision of the CONTRACTING PARTIES that dispute settlement process in the GATT "cannot add to or diminish the rights and obligations provided in the General Agreement".

Hence, the panel said, the requirements of Art XXIV were not modified by provisions of Part IV and a "legal justification for the tariff preferences accorded by the EEC to imports of bananas originating from the ACP countries could not emerge from an application of Art XXIV to the type of agreement described by the EEC (in the panel proceedings relating to the Lome), but only from an action of the CONTRACTING PARTIES under Article XXV."

"Such action would enable the CPs to provide both the parties to this agreement and any cp affected by the tariff preference with the benefit of a legal certainty for planning investment and conducting trade in bananas," the panel further observed.